Midcap IT firms, which were growing at around 25-45% year-on-year during the last few quarters due to the move towards digitisation and cloud, which started during the pandemic, are likely to face constraints this fiscal. Some may also also lag behind the already slowing big IT majors, analysts said.
Some midcap IT companies like Mphasis and Birlasoft have faced client problems recently, with LTTS having to resolve its visa issue by paying compensation.
V Balakrishnan, chairman, Exfinity Ventures and former CFO of Infosys, said, “Midcap IT companies don’t have the depth and breadth of customers and verticals like large caps. They don’t have the benefits of having a large portfolio of Fortune 500 and mid-sized clients. Thus, if a single big client collapses, they won’t have the option to fall back on other large clients”.
Even as bellwether IT firm, TCS is trying to de-risk by having more medium and small deals, Midcap firms are still sitting on a skewed deal distribution and risking themselves with clients concentration.
For instance, for Coforge its top 10 clients contribute 36%, and top five 23%. For Persistent Systems, top 10 clients contribute 37.4%. For Mphasis, top 10 clients contribute 59%, and top five 44%. KPIT’s financial report says that its strategic clients’ contribute more than 81% of its total revenue.
Gaurav Vasu, founder, UnearthInsight, said, “Tier 2 and Tier 3 IT service companies who are known for specialisation will continue to see higher growth compared to Tier I, because clients who outsourced to them haven’t only done it for cost optimisation but for their specialisation and delivery models. However long tail of Tier 3, 4 or SME Tech service players focused on body shopping or sub-contracting or generic services might face risk of vendor consolidations and face stiff pressure”.
On the falling valuation of stocks of some midcaps, Peter Bendor-Samuel, CEO, Everest group, said, “We may see one or more of them merge or change ownership as valuations drop and private equity becomes more active”.
Peter, added, “The industry is going through a deceleration as discretionary spending is being cut as the post pandemic boom finishes and firms enter a more mature phase digital transformation.”